(FORTUNE Magazine) – OKAY--SO IT AIN'T GOOGLE. BUT what's one of the best ways to outperform the market? The answer: dividend stocks. Long derided as dowdy "widow-and-orphan stocks" for their low risk and steady cash payouts, dividends are today--dare we say it?--hot. So far this year, S&P 500 stocks that offer dividends have outperformed those that don't by a whopping ten percentage points.

Dividend supremacy may be here to stay. For starters, corporations are sitting on mountains of cash. After slashing expenses and improving profits in recent years, S&P 500 companies are reporting a 19% uptick in earnings this year, and cash flow has soared. Non-financial corporations in the S&P 500 are sitting on $600 billion in cash. And, says Don Taylor, manager of the Franklin Rising Dividends fund, companies "simply aren't finding enough investment opportunities to use it all up."

So they're giving the money back to stockholders. Since May 2003, 382 S&P 500 companies have raised dividends, and 25 initiated them. Meanwhile, a desire for dividends has been mounting since last year's tax cut, which lowered the top federal rate on dividends from 38.6% to 15%. Many investors are embracing "total return"--the change in the stock price plus dividend income. In the 1990s few cared about a 1% yield when stocks routinely rose 20% in a year, notes Minerva Butler, who runs the Vanguard Dividend Growth fund. Today, she says, an 8% gain sounds alluring, and "a company that can pay a dividend of 2% is already a quarter of the way there in getting you a total return of 8%."

That thought might prompt you to rush out to buy stocks yielding 5% or 6%. Not so fast. Those high yields may be the result of battered share prices that point to serious underlying problems (see box below).

For this story, we looked for stocks with strong total-return prospects--good dividends and growth potential.We began by narrowing the universe to companies yielding at least the market average (1.5%) and trading below the S&P's average price/ earnings ratio (16.4, based on projected 2005 earnings). We eliminated firms hammered by scandals, such as Marsh & McLennan and Merck. Instead, we focused on companies with strong earnings growth and cash flow, improving balance sheets, and pension plans that probably won't require cash injections. Finally, we grilled top analysts and portfolio managers. The result: four choices with potential for both rising dividends and price appreciation. There's nary a highflier among them, of course. But if you're looking for steady performance--and a good night's sleep--these four can deliver.

McDonald's (MCD, $30) The turnaround at the Golden Arches continues, thanks to healthier food choices and longer store hours. Earnings will soar 33% this year, analysts predict, and they should climb 8% annually for the next few years. The stock has jumped 23% in 2004, but it still trades at a P/E of 15.2. After raising its dividend by 70% in 2003, McDonald's upped it another 38% this year to 55 cents a share, giving it a 1.9% yield. "McDonald's decided to slow new-store growth and fix the installed base," says Vanguard's Butler. "By ratcheting back their [capital expenditures], they've got lots of cash on hand and have been able to boost their dividends."

PPG Industries (PPG, $67) The former Pittsburgh Plate Glass is now a diversified manufacturer focused on three lines: coatings, glass, and chemicals. "The company has done a good job of transforming its mix toward higher-growing businesses," notes Scott Glasser, a fund manager at Citigroup Asset Management. As it increasingly passes along rising material costs to its customers, PPG should boost earnings at an 8.5% annual clip in coming years, and with a P/E ratio of 14.7, it's still pretty cheap. PPG pays a 2.7% yield, but investors should see more upside. PPG has paid a dividend since 1899 and has raised it nearly every year for three decades.

Wells Fargo & Co (WFC, $62) Financial services firms have been aggressive in hiking dividends. But what sets the nation's fifth-largest bank apart is its strong credit rating and its dividend-loving history. (It has paid one every year since 1939.) Today shareholders receive a 3.1% yield. The bank is expected to increase earnings at an average annual rate of 12% for the next five years. Better yet, the stock trades with a P/E of 13.4, making it cheaper than peers like Bank of New York and J.P. Morgan Chase.

Deere & Co. (DE, $68) Profits at this farm equipment company are expected to soar 95% this year and continue climbing about 10% annually as the global farming industry rebounds. Yet its stock trades at a P/E of 11.7. And did we mention it's sitting on $3 billion in cash? "The balance sheet of this company is very healthy," says Sujatha Avutu, manager of the Evergreen Equity Income fund. The company's dividend yield is 1.7%, but Avutu thinks Deere may be inclined to beef it up: She notes that during the last upswing in the farming cycle, the company's yield averaged about 2.7%.

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